Small banks face dilemma over cards.

The credit card industry looks like a classic case of the biggest getting ever bigger, squeezing out the small issuers who began as mainstream players.

The latter face a strategic dilemma similar to that of U.S. community banks in general: whether to stay in or get out. And if they stay in, on what terms?

To be sure, several thousand community banks and credit unions remain on the membership rolls of MasterCard International and Visa U.S.A. Many are happy to be there, especially at a time of robust industry profits.

But others acknowledge they will soon have to make tough, longer-term choices.

Deferring to Customers

Brenda Lou Werner, vice president of Farmers State Savings Bank in Independence, Iowa, has resolved to stay in the business, but more as a convenience -- or necessity to meet customers' needs -- than as a profit generator.

"We intend to provide all the necessary products and services to depositors to remain competitive," Ms. Werner said.

"Unless our client base increases," she added, "our program may evolve into a break-even product or become packaged together with other accounts and services to justify its existence."

A bank can sell its portfolio outright. Many did, in fact, in the late 1980s, even those with much larger card businesses than the typical community bank. The portfolio market has largely dried up since, but that cycle could certainly turn again.

If staying in the business on their own is not an alternative, because margins cannot match those of the big banks with economies of scale, small institutions can become an agent of a larger bank or participate in a trade association program that gets them "group rates" on processing and account features.

The association route is championed by Linda Echard, who runs a program for more than 1, 500 members of the Independent Bankers Association of America.

"By issuing through group alliances small issuers can provide feature-rich cards that will be competitive with any in the market," said Ms. Echard, president of IBAA Bancard.

Other Programs

To support her point, she reeled off several other associations -- the Credit Union National Association, Payment Systems for Credit Unions, National Council of Savings Institutions -- that bring large numbers of small issuers into the card business.

They are up against some seemingly inexorable trends in market share.

The 10 largest credit card issuers controlled 58.1% of the $194 billion of financial institutions' card outstandings at yearend 1992, according to the Faulkner & Gray newsletter Credit Card News. The top 25 issuers controlled 80.3%.

Those bigger issuers are expanding their slices of a growing pie. In 1991, the top 10 had 57.8%, and the top 25 had 78.2%, of a $179 billion market.

Conversely, all issuers below the top 25 had a 19.7%, or $38.2 billion of card loans, on their books in 1992. That was down from 21.8%, or $39.1 billion, in 1991.

Keith Floen, president of the Credit Union National Association's Credit Union Card Services unit, is not alarmed. As he notes below, the answer may lie in defining the business more precisely.

Filling In the Gaps

For Mr. Floen's group, which has six million MasterCard and Visa accounts, service takes precedence over profits. Credit unions are growing in the card business because they are rounding out their full-service product packages.

He claims credit unions' close contacts with members enable them to avoid many of the losses that plague mass issuers. And they minimize back-office and administrative costs by outsourcing.

Because they are building on existing relationships, he added, credit unions spend $20 to $45 less than the $70 to $80 that a big bank typically spends to open a new account.

BRUCE J. BRITTAIN

President Brittain Associates Inc. Atlanta

The future for many small credit card issuers is bleak. Consumers are constantly exposed to high-value card offers that severely test their loyalty to their current cards. As a result, the market share shift from small issuers to national issuers continues steadily.

The small issuers' best defense is creative market segmentation, but many are ill-equipped to employ this strategy effectively.

Data base marketing is not a skill that has been nurtured by many small issuers.

Therefore, "creative market segmentation" is just so much gobbledygook to them, and their portfolios continue to shrink as the competitors successfully target some of their best, most profitable customers.

DAVID C. MORGAN

Executive vice president CCS Technology Group Maitland, Fla.

The maturity of the credit card market is definitely going to be a factor in the business, but I don't believe that only the big, dominant players will survive.

I have seen banks with only 10,000 accounts not only being successful, but able to justify operating their systems in-house. That becomes a purely philosophical decision, and is not just about economies of scale.

We saw a lot of banks leave the card business in the 1980s. Often they needed to sell portfolios as a survival strategy. Most of that activity is behind us, and I don't anticipate another round of consolidation like that. Too many people are happy to stay in the business. For many of them, credit cards are the profitmaker.

KEITH J. FLOEN

Senior vice president Credit Union National Association Madison, Wis

Small card issuers, especially credit unions, don't see themselves as small. They see themselves as being focused on service before profits. In the long run, no organization, regardless of size, will have profits without service. I view credit unions as "multiple service issuers" rather than "small issuers."

Multiple service issuers will continue to grow at a faster rate than the credit card industry as a whole for three reasons.

They have multiple relationships with cardholders, which is a key to ongoing customer loyalty. The have personalized relationships with customers, which are enhanced by MasterCard and Visa products. And they have a pricing advantage through superior knowledge of their customers and lower fraud and credit losses.

LINDA F. ECHARD

President IBAA Bancard Arlington, Va.

Savvy CEOs of small banks, thrifts, and credit unions have long recognized that it is vital to control their own card products.

Small issuers excel at providing the individualized service that educated, maturing customers will demand in coming years. Smaller issuers also have contributed to the overall health of the industry with their grassroots clout and their efficient delivery of card services to rural America. And they add to competition, which benefits consumers and fosters innovation.

Competing on price is not difficult. These issuers' acquisition costs, overhead, and loss ratios are lower than those of most large issuers. Their challenge is to be creative on card features and aggressive in marketing.

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